Netflix (NFLX) - Get Report went to market on Monday.

This news did not really make big headlines, but the firm borrowed $1.6 billion in what was its biggest bond sale. This particular offering will mature in 2028, and it went off at a yield of 4.785%. The deal was oversubscribed, as bankers supposedly fielded orders for roughly $2.5 billion. Why is this significant?

It's no secret that this has been a big year for corporate debt. Firms have raised more than $1.4 trillion here in the U.S. in 2017. That's a record pace. The fact is that this has been a poor year for junk. New issuances across that market have raised a rather paltry $215 billion. Netflix equity has performed very well this year, however, its ratings from both Moody's and S&P Global land the firm's debt in the junk category. What gives?

As you know, I usually dabble in the FANG stocks around earnings time. Last week was no different. Made a few bucks overnight on this name. The stock has come in a bit. Is it worthy of equity investment at this point, worthier than that of a mere short-term trade? Netflix is running into some interference from Walt Disney (DIS) - Get Report . That has been well-publicized information.

Netflix has already told us that the firm expects to see free cash outflows of $2.5 billion this year. Though subscription has been strong, the firm expects the expense of its own original content to run up to $8.0 billion in 2018. The recently announced price hike was huge, and smart. There will have to be more of that, and growth in that particular space will have to managed incrementally. On top of that, the firm will have to show not just international subscriber growth, but international profit, as well. Bottom line for me: this could be time to wet the beak. That said, I am starting out with about a tenth of a position, rather than my usual one-fifth.

I think the speculative and volatile nature of this stock, coupled with the danger associated with hedging this name through the options market, make this a yield sign. Notice that I did not say "a stop sign". We'll go slow and keep our eyes open.

Charts of the Day (NFLX vs. DIS)

Believe it or not, I think the case can now be made for equity ownership of both of these names, though they appear to be in clear opposition to each other. Now, to be clear, both come with risk, and I strong suggest hedging be done through the options market where it can be done effectively. For your information, I am long both names. I am wearing a full long position in Disney, and actively sell both calls and puts against this position every month, depending on which way I think the wind is blowing. I am also long an odd-lot of NFLX, with the intent to buy more if the market should bestow upon me a discount.


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This chart clearly illustrates the stock's outperformance since experiencing a golden cross in the wake of third-quarter 2016 earnings. The Chaikin Money Flow indicator (on the bottom) infers that institutional investment has been positive almost all year, and remains so. However, the moving average convergence divergence (MACD) indicator suggests that the short-term selling that began last week could continue for a bit.

This is where it gets a little tricky. You can see that the stock price has used the 50-day simple moving average (SMA) as support since the summer, and the central line on a year-long Pitchfork model as resistance. What does this chart tell me? My thought is that I will likely triple my small holdings just above $181 if permitted, and then, assuming that this all works out the way I plan to unload half of that accumulation at or slightly above $200. The eventual intent here would be to end up with a long-term investment that is almost entirely made up of house money.


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This is a far sadder story, but all is not lost. Unlike the golden cross experienced by NFLX, DIS experienced a death cross back in early August. Much ugliness ensued. Here, we have a Chaikin Money Flow indicator that after a mega-does of institutional selling has started to raise its ugly little head. You also have a MACD that has tried to go positive for two weeks. It's not there yet. That's why we hedge these things, but it's obvious that the stock has found at least some short-term support above the $96 level. Let's take a look at some Fibonacci levels, starting the model with the August selloff. Your 38.2% retracement would land the stock above $101. The stock has already seen resistance there. Should that early October resistance end up looking like the first shoulder on a developing head and shoulder pattern, the thought here is that we may get a chance to make a sale above $103, as that 50% could be the head in such a pattern. Hey, gang. It's a plan.

(This is an excerpt from Stephen "Sarge" Guilfoyle's Morning Recon, which now appears exclusively on Real Money, our premium site for active traders. Click here for a free 14-day trial and receive Morning Recon every day, along with exclusive columns from Jim Cramer, James "RevShark" DePorre, technical analyst Bruce Kamich and more.)

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At the time of publication, Stephen Guilfoyle was long NFLX, DIS, although positions may change at any time.